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E-ESTONIA: ASSESSMENT OF A DIGITAL REFORM By Gergő BATIZ Submitted to Central European University Department of Economics In partial fulfillment of the requirements for the degree of Master of Economic Policy in Global Markets Supervisor: Professor Lajos BOKROS Budapest, Hungary 2016 CEU eTD Collection

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Page 1: E-ESTONIA ASSESSMENT OF A DIGITAL EFORM · citizens: ID-number, name, birth, gender, address history, legal status / citizenship, and legal relationships. In all other databases,

E-ESTONIA: ASSESSMENT OF A DIGITAL REFORM

By

Gergő BATIZ

Submitted to Central European University Department of Economics

In partial fulfillment of the requirements for the degree of Master of Economic Policy in Global Markets

Supervisor: Professor Lajos BOKROS

Budapest, Hungary

2016

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EXECUTIVE SUMMARY

This thesis studies the association between the usage intensity of digital services

and 1) citizens’ attitudes, 2) competitiveness and productivity, and 3) openness in the

case of Estonia.

Citizens’ attitudes are measured through their trust in different institutions,

through perceived levels of corruption, and through election turnouts. The limited data

available fails to confirm any association between usage and trust levels, and between

usage and corruption perception, but identifies a higher election turnout rate when the

e-voting service is available.

Competitiveness and productivity is measured using the two most popular

rankings from World Bank and World Economic Forum, and labor and total factor

productivity data. No association shows up related to productivity data, but a higher

increase in usage levels are associated by a less deteriorating score of regulatory

burden, confirming a favorable connection between service usage and business

environment.

Openness is measured by FDI and business demographics. The analysis

uncovers a positive relationship between usage intensity and FDI stocks but no visible

change in company ownership patterns.

Based on the results, further research is recommended to the scientific

community, and the continuation and extension of reforms to Estonian policymakers.

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TABLE OF CONTENTS

CONTENTS Executive Summary ............................................................................................. i

Table of Contents ................................................................................................ ii

Introduction ........................................................................................................ 1

Importance of the Topic and Aim of Research ................................................ 1

E-Government Services in Estonia ................................................................. 2

What is E-Government? .............................................................................. 2

Infrastructure ............................................................................................... 3

Principles .................................................................................................... 5

Legal framework, Establishment of System, Keys to Success .................... 6

Literature Review ............................................................................................... 9

E-Government and Citizens' Trust in the State ............................................... 9

What is Trust? ............................................................................................. 9

Why is Trust Important? ............................................................................ 10

What Drives Trust? ................................................................................... 11

E-Government, Competitiveness and Productivity ....................................... 14

Competitiveness and Administrative Burden ............................................. 14

What Government can do about it? .......................................................... 16

E-Government and the Openness of the Country ......................................... 17

Why is Openness Important? .................................................................... 17

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How can E-Government Influence Openness? ......................................... 19

Analysis ............................................................................................................ 20

Usage Data ................................................................................................... 20

Citizens’ Attitudes ......................................................................................... 21

Hypotheses ............................................................................................... 21

Data Sources and Description .................................................................. 22

Trust in Institutions .................................................................................... 25

Corruption ................................................................................................. 27

Election Turnout ........................................................................................ 28

Competitiveness and Productivity ................................................................. 30

Hypotheses ............................................................................................... 30

Data Sources and Description .................................................................. 31

Competitveness ........................................... Error! Bookmark not defined.

Productivity ............................................................................................... 34

Openness ..................................................................................................... 34

Hypotheses ............................................................................................... 34

Data Sources and Description .................................................................. 35

FDI ............................................................................................................ 36

Business Demography .............................................................................. 36

Conclusions ...................................................................................................... 38

Policy Recommendations ................................................................................. 40

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References ....................................................................................................... 42

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INTRODUCTION

Importance of the Topic and Aim of Research

We are living in an age of where everyone and everything are connected. Yet in

all too many countries we do official business as if we were still living in the 20th or

19th century: endless paperwork, spending long hours waiting in government offices,

going back and forth between administrators.

E-government is one of the buzzwords when it comes to public administration

today. Indeed, properly implementing electronic services can result in enormous cost

savings for the state, the private sector and ordinary citizens alike, while a lean

administrative environment can also increase the competitiveness and attractiveness

of a country.

Estonia is currently the go-to country when it comes to the best e-government

implementation, at least according to popular media, and implementing the Estonian

model in another country seems to promise the same benefits.

But is the system really so great? There is little scientific work regarding macro-

level changes in association with e-government service usage in Estonia.

Therefore, the aim of this graduation thesis is to study the association between

the usage of e-government services in Estonia and changes in three main areas:

Attitudes towards the state, competitiveness and productivity, and openness of the

economy.

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E-Government Services in Estonia

What is E-Government?

Van Dijk (2012) defines electronic government (e-government) as follows: “all

data, communication and transaction processing activities related to governmental

tasks and responsibilities in which ICT is being used”. This is no doubt a loose definition

as according to it, any involvement of IT already makes for having

e-government in a country. However, it is obvious that it is wrong to equate a system

where electronic tax filing takes two hours and it is one of a dozen services available

online, with an other system where tax filing takes 5 minutes and hundreds of services

are available. Therefore, when a government claims that it has implemented e-

government, this practically doesn't mean anything until one looks more deeply into

the scope of services available and the quality of their implementation.

The reason why the Estonian e-government system is the topic of this paper is

that it offers services in unparalleled number and quality, and it have effectively

transformed the way how citizens interact with government, and how people transact

and get things done in general. As an example: Automated tax-declarations, no need

for driver’s license and registration documents while driving, electronic voting even on

national elections, or a digital signature that is today preferred to manual signatures,

just to name a very few from the many hundreds of municipal and state services

Estonians can use today. (eesti.ee 2016)

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Figure 1 – Prime Minister Taavi Roivas authenticating via his smartphone before

approving three bills from Parliament (Source: The Huffington Post online)

Infrastructure

The Estonian system is built on three core elements: the ID-cards, the National

Register, and the so-called X-Road network.

The ID-card is compulsory to all Estonian citizens. It is both a traditional ID with

a biometric data chip, but also a key to all digital activities: It contains a cryptographic

key-pair that is used to identify a citizen and to encrypt communications between the

user's computer and the servers of the system. Public-key cryptography is also used

to generate the time-stamped digital signatures on any document or transaction. The

ID-cards have a SIM-card extension as well, so users don't need to use a USB card

reader anymore but they can do all authentication via their cellphones if they prefer

(European Commission 2016).

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The National Register is the database containing the basic information of all

citizens: ID-number, name, birth, gender, address history, legal status / citizenship,

and legal relationships. In all other databases, only the IDs are used, so this is the

database that is needed to observe real the identity of citizens, other databases by

themselves are anonymous.

Figure 2 - The X-Road infrastructure connecting all elements of the system.

(Source: Republic of Estonia Information System Authority (RIA) 2016)

X-Road is a secure data-sharing network connecting all users and servers of the

e-government system using standard data formats.

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Principles

The general organizing principle is that no data should be stored in more than

one place. Different national databases (healthcare, education, criminal records, etc.)

exist separately and only IDs of citizens are stored, but not their identity (which must

be queried from the National Register based on ID in case it is needed). This way data

on people is always stored separately and anonymously and can only be connected

with the authorization of the data owner (the citizen) or in well-defined cases, resulting

in fair privacy. Furthermore, all citizens and entities can access all the data stored on

them and also view a full log of who requested data on them (e.g.: doctors and

pharmacists query medical information, police query criminal record and driver’s

license in case of a routine roadside check, educational institutions query data when

processing applications, etc.). Unauthorized query is a criminal offense punishable

even with imprisonment. Since it is in the mutual interest of all parties to maintain trust

in the system, regulations are strictly enforced and independent security audits are

frequently taking place (Herlihy 2013).

Some entities are also linked together. This way board members and employees

are linked to companies so they can securely transact in the name of their companies

as well. Property is also linked to entities, this way owners of land and real estate can

be seen when browsing the land registry, just like the wealth and business stakes of

public officials. This radically improves transparency (Herlihy 2013).

Some third parties can also connect to these databases. All banks, utility and

telecommunications companies are connected to the system, so banks can

autonomously perform credit assessment, telecommunication companies can check

regular income before contracting for a subscription, etc., provided that the client

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granted access to his / her data to them. The system makes anonymized data available

by offering API-s and providing built in visualization tools via the main website, enabling

researchers and statisticians to work more efficiently (Herlihy 2013).

Legal framework, Establishment of System, Keys to Success

There is no one comprehensive

legislation governing e-government services.

Instead, numerous laws regulate different

aspects of the service, such as the data

protection act, signatures act, consumer

protection act, archives act, public information

act, and so on. The system itself was

established in a gradual way, overarching

different governments (Herlihy 2013; Vassil

2015).

1998 -2003

•Principles of the Estonian Information Policy I

•Principles of the Estonian Information Policy II

2004-2006

•Estonian Information society

2007-2013

•Programme for Increasing Awareness of the Information Society

2008-2011

•Information Society Strategy for Local Governments

2009-2011

•Information Security Policy

•Implementation Plan

2011•Estonian Broadband Strategy

2012•Estonian Cyber Security Strategy

2013•Estonian Information Society Startegy

2014-2017

•Cyber Security Strategy

2014-2020

•Estonian Information Society Strategy

Figure 3 – Legislative Timeline Leading up

to the Current System

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New ID-cards were

introduced in 2002, but as it can

be seen from the chart, usage

growth wasn't significant until

around 2006. The main reason

for this was a digital divide in

society, and that many

households did not realize the

benefits of having an internet

subscription and therefore using

the services provided by the

system. The solution for this

fundamental obstacle came

primarily from the private sector:

Banks, utilities and telecommunications companies wanted to go as digital as possible

for cost-efficiency reasons, and with the backing of the government, there was a joint

effort launched (‘Tiger Leap Project’) aimed at educating the population on ICT and

introducing digital solutions in public schools. Since companies actively pushed for

using the new-generation ID-cards, people were getting them anyway and they stared

to realize the benefits. This is when service usage growth picked up enormous

momentum and made today's digital society in Estonia a reality (Vassil 2015).

All-in-all, the most important enablers of realizing this system were probably the

strong cooperation between the government and the private sector in transforming the

way Estonians transact; and a political consensus overarching all governments that

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ion

sCumulative number of

Authentications and Signatures (annual average)

Authentications Signatures

Figure 4 – Cumulative Number of

Authentications and Signatures

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the country should specialize on ICT after the change of systems, and probably also

some sort cultural setup that enabled citizens embrace this new way of doing things.

For the rest of this thesis, the term ‘digital services’ will be used to refer to services

that can be used via the e-government system.

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LITERATURE REVIEW

E-Government and Citizens' Trust in the State

What is Trust?

Literature primarily on trust itself goes back to the second half of the 20st century.

Arrow (1974) describes trust as a lubricant to economic exchange and an efficient

mechanic governing transactions. He thinks of trust as a form of 'implicit contracting'

where parties agree not to unfairly exploit the other and suggests that trust is a unique

intangible commodity. Such view of trust as an asset gets carried forward by other

scholars later: Coleman (1990), Putnam, Leonardi, and Nanetti (1993) and Fukuyama

(1995) all include trust as a component to 'social capital', together with norms and

networks. Putnam also argues that such social capital enhances a society's ability to

facilitate coordinated action, that is, to organize. Levi (1996) extends the concept with

a risk factor: She describes trust as a set of socio-psychological phenomena that

enable individuals to take risk when engaging with others, solve problems of collective

action, and mutually act against their narrow short-term self-interests, in order to reap

benefits from cooperation. Levi further suggests that trust is formed by a rational

(although possibly subconscious) decision.

Partly due to its intangible nature, the concept of trust is not straightforward to

grasp. It can be concluded however, that it is an intangible social asset, it influences

interactions among individuals and how they organize as a group, and it serves as one

end of an implicit agreement to put aside selfish short-run self-interest for longer-term

cooperation and mutual benefit.

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Why is Trust Important?

As the previous paragraph already suggests, trust has far reaching implications

for society. Leibenstein (1987) have studied trust as an economic input from a game

theory perspective, and concluded that it served as a coordinating mechanism

enabling players to play out games to the highest individual and social benefit.

Continuing Leibenstein's line of thought, we can think of (economic) life as an infinitely

repeated prisoner's dilemma, where players who trust each other can play out the

socially optimal outcome. Using this example, it can be argued that trust on a social

level is no else than people playing nice with others in anticipation of being

reciprocated. This implicit agreement makes production and exchange possible

(Misztal 1996). Therefore, societies with higher levels of trust and social capital in

general are more likely to produce the set of institutions necessary for economic

growth, than societies with less of it (Levi 1996). As Levi (1996) continues to elaborate,

trust has serious consequences to government as well: Trust affects citizens' tolerance

level of the regime and their compliance with the its laws.

Putnam, Leonardi, and Nanetti (1993) had compared Northwestern and Southern

Italian societies and they had concluded that the better performance of institutions in

the North was attributed to higher levels of trust in that society, as the dominant

interpersonal relation was generalized towards the government and the individual too.

Based on their findings, they establish that a high level of trust is essential to well-

functioning institutions. Guiso, Sapienza, and Zingales (2000) had further investigated

the issue, but focusing on the financial profile of households. They have found that in

areas with high levels of social trust, households are less risk-averse: they invest a

larger portion of their savings into stocks, they tend to use more of formal arrangements

for getting credit and less informal lending. Perhaps not surprisingly, firms in these

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areas had easier access to credit and more shareholders on average, overall leading

to a more financially sound economy. Continuing on the fiscal line of argument, it is

important to point out the work of Randlane (2012) on tax compliance in Estonia: He

confirmed the seemingly trivial claim that general attitudes towards the state affect

compliance with the obligation to pay taxes, as the more people trust the state, the less

tax they avoid. Lühiste (2006) also point out how higher levels of social trust are leading

to more equal societies through solidarity.

This section about the importance of trust is probably summarized the best by

Bjornskov and Meon (2013), who conducted a sophisticated inquiry into the casual

mechanism from trust to economic growth. They have uncovered a robust chain of

causality: Higher levels of trust lead to better education, legal and bureaucratic

institutions, and these ensure a significantly higher per capita growth of income. In their

analysis, the quality of political institutions doesn't play a significant role in this chain,

only economic-judicial institutions.

What Drives Trust?

As Mishler and Rose (1998) summarize, there are two main approaches when it

comes to what influences trust in institutions:

Cultural theorists claim that trust in institutions is politically exogenous and

national political trust is directly proportional to the prevailing national interpersonal

trust. Many of the already showcased ideas fall into this category, such as Fukuyama’s

(1995) claim that more trusting individuals are more likely to organize, or Putnam,

Leonardi, and Nanetti (1993) and Helliwell and Putnam (1996), claiming that

institutional trust is a bottom-up construct stemming from the personal interactions

between people.

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Institutional theorists, on the other hand, assert that trust in institutions is

politically endogenous and is a function of the perceived policy performance and ability

of the government to deliver economic prosperity (Przeworski et al. 1996).

As it is generally the case, the true nature of trust is likely to be correctly described

by both of these approaches. Culture should definitely have a strong effect or an initial

calibration on an individual's trust in institutions, but a rational individual is also rightfully

expected to reevaluate his trust in institutions based on their performance. Lühiste

(2006) have examined exactly these relationships in the Baltic states and have

confirmed both mechanics with real data:

The cultural explanation was confirmed by the study, as variation in interpersonal

trust explains 11% of the variation in trust towards government among different nations.

This weak but robust finding is in line with the results of Mishler and Rose (2001) who

also concluded that institutional explanations of trust are stronger that cultural ones.

Institutional theories were also confirmed (R2 = 15%): Governmental and

economic performance of the government (outcomes) influences trust, and the less

corrupt a government is perceived by its citizens, the more trusting they are. Also it is

worth pointing out here that Estonia is the least corrupt country in the CEE-region

according to Transparency International's Corruption Perception Index. Political

performance (how government works) also significantly influences public trust in

institutions. '[…] transparent and efficient administration' is recognized as a driver of

this performance, therefore a well-functioning e-government system can in theory

strengthen trust in the state.

The study had some more general findings as well. In general, Baltic people

distrust their parliaments and parties more (57% of population don't trust) than other

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CEE countries (51%) while having roughly the same level of interpersonal trust in the

society. It is also worth pointing out that the most trusted institution also happens to be

the least democratic one: the military. The author explains the situation by history, and

by the fact that the older population tends to be more suspicious towards government

and the younger ones are expected to bring about change in trust, but the results show

only a weak negative correlation between age and level of trust.

Lühiste (2006) have examined the drivers of trust in a comprehensive framework,

but there are other scholars pointing out some more concrete relationships: Lipsky

(2010) emphasizes how important the role of government's agents is: Citizens tend to

project their experience with street-level bureaucrats on the state in general. Levi

(1996) further underlines the importance of using high standards in the recruitment of

government and administration employees exactly for this reason. Most importantly for

the present study, Im et al. (2014) have analyzed the relationship between trust in the

government and internet and e-government usage: They have concluded that in

general, internet usage is negatively correlated with trust in government (most probably

because it leads to better-informed citizens), but internet usage combined with e-

government usage doesn't exhibit the same relationship. Based on this, it can be

inferred that e-government usage boosts trust in the state, especially in the case of

Estonia, where broadband Internet usage is extremely widespread already (European

Commission 2016), so the trust effects of internet usage are already in the baseline.

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E-Government, Competitiveness and Productivity

Competitiveness and Administrative Burden

As Bjornskov and Meon (2013) proved, trust leads to higher overall productivity

levels and therefore higher growth. Naturally, the level of growth is influenced by many

other factors besides trust. The growth of an economy is the increase of its level of

output. Output is the result of combining input factors using a certain technology. In

case of a country, we can think about technology in the most general sense, also

including everything about how people do business, interact, and live their lives in

general. From a business point of view, this set of cultural factors form an important

determinant of the business environment alongside the regulatory setting, the quality

of institutions, endowments of production factors and capital, and human resources.

Competitiveness is essentially the state of the business environment of an

economy relative to others. Increasing competitiveness is or should be a core objective

of any sane economic policy, as it enables the economy to produce more output using

the same amount of resources, or if the country also competes for investment in an

open setting, it can attract additional inputs to production (FDI, talent etc.) on top of

efficiency gains. Therefore, improving aspects of the business environment is key. A

well-functioning e-government system is favorable in this regard, as by increasing trust,

it creates a culture that is more conductive to cooperation and organization, it increases

the quality of institutions, and it decreases corruption. These are merely indirect effects

through trust, but having a well-functioning e-government system in place also directly

affects the business environment and competitiveness by reducing administrative

burden.

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Allers (1994) defines administrative burden as the cost businesses incur in

complying with data provision and reporting regulations. A. F. M. Nijsen (2003) and

Ntaliani, Costopoulou, and Sideridis (2012) further add that such compliance ties down

considerable resources which is especially burdensome for small and medium sized

enterprises. The importance of reducing this burden is widely recognized by

governments, and countless policies are set up to this end (European Commission

2007; UK Cabinet Office 2006).

Figure 5 - The 12 Pillars of Competitiveness of the

World Economic Forum’s Global Competitiveness Report

(Source: World Economic Forum 2016b)

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What Government can do about it?

As Wegrich (2009) describes, the Standard Cost Model called Mistral is currently

the standard to use by the European Union and the OECD for quantifying

administrative burden. A. F. Nijsen, Vellinga, and others (2001) explain that 3 main

factors influence this hindrance: 1) The amount of regulation and rules to comply with,

2) How control and checks of compliance are implemented, and 3) How the

administrative infrastructure used for information transfer is designed. E-government

affects the business environment directly through this third channel, by simplifying and

automating the administrative infrastructure. As Zuurmond and Robben (2009) specify,

the most important source of administrative burden is paper-based bureaucracy.

Indeed, as it was already recognized by the end of the 80s, computerization lowers

communications time and costs (Hammer and Mangurian 1987; Malone, Yates, and

Benjamin 1987).

Allers (1994) looks at government in this system as a provider of services that

cost money to implement and offer, but create cost savings for businesses. This

essentially means that there is a transfer of costs from business to the state and if we

believe that the market is better at allocating additional resources, such pure cost-

transfer mechanisms already generate efficiency gains. But automating processes and

making them paperless not only transfers costs from private to public sector, but also

reduces costs. Time spent on getting things done, the costs of paper handling, the time

needed to fill out forms, the time of message transportation, and the time needed for

processing incoming data, just to name a few, are either eliminated or drastically

reduced. Unseen it may be, but standardizing reporting enables the creation of

standardized and consolidated databases, that can make administrative processes

even more streamlined in the medium to long run (Bergeron and Raymond 1997;

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Boonstra and de Vries 2005; Elgarah et al. 2005; Henriksen 2002; Mäkipää 2006;

Young, Carr, and Rainer 2000). Furthermore, empirical evidence confirms that the use

of e-government helps founders to establish companies faster and more cheaply, and

boosts company productivity in general (Badri and Alshare 2008). All this shows well

that government has in its discretion a powerful set of tools to unencumber business

and boost growth in the form of electronic service delivery and administration.

E-Government and the Openness of the Country

Why is Openness Important?

The basic economic paradigm of trade is the exploitation of comparative

advantages for the mutual benefit of trading partners by specializing in producing the

good or service with the least opportunity cost, and then trading these. As Krugman

(1979, 1980) explains, gains arise from more variety to consumers and higher quality,

and lower equilibrium prices as firms reap cost-efficiency from economies of scale. As

Andersen and Babula (2008) reports in their review of papers on the subject, the size

and the distribution of welfare gains are disputed by scholars, but not their existence

as such.

The relation of trade and growth is better understood (Andersen and Babula

2008): Trade affects productivity mainly through two channels: The first is that

openness enables quicker capital accumulation leading to higher growth levels. This

was found not to be the strongest channel (Klenow and Rodriguez-Clare 1997; Hall

and Jones 1999). The channel empirically confirmed to be more relevant is a second

one, productivity growth (Frankel and Romer 1999): Exposure to competition by trade

incentivizes firms to be more efficient and wet out inefficient firms, leading to an

average higher productivity; it gives access to foreign intermediary inputs and

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technology; it expands market size enabling economies of scale; and it fosters

international knowledge diffusion. It is empirically measured by Coe and Helpman

(1995) that foreign R&D enhances domestic productivity and further confirmed by

others (Keller 1998; Lumenga-Neso, Olarreaga, and Schiff 2005; Сое, Helpman, and

Hoffmaister 1997). It should also be pointed out that trade can lead to the opposite

effect if a country happens to be specialized on a knowledge-unintensive industry, or

there is a lack of complementary inputs needed for the production of relatively

technologically advanced goods (Basu and Weil 1996; Acemoglu and Zilibotti 2001).

A number of empirical studies have proved these theories: Hakura and Choudhri

(2000) confirmed that openness increases productivity growth, especially through

import competition and especially in mid-growth sectors. They have also found a weak

positive effect through the export expansion channel in the case of high-productivity

sectors. No effect was confirmed for low productivity sectors, as they are probably

engaged in niche-markets or went bankrupt from foreign competition. Paolo Figini and

Enrico Santarelli (2006) and Gozgor (2014) examined the effect trade has on

unemployment in the G7 countries and have found that all trade openness measures

are inversely correlated with unemployment. The study of Ramona and Ioana (2014)

suggest that the flow of FDI, an important component of international flows, is a good

predictor of changes in long-run economic growth (positive relationship). Gokcekus,

Muchova, and Brincikova (2015) discovered that not only technology and knowledge

spills over form more advanced trading partners, but business culture as well: They

have found that openness to a less corrupt trading partner reduces corruption levels of

a country.

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How can E-Government Influence Openness?

As the empirical studies also point out, FDI is a vital aspect of international flows.

A number of factors closely related to competitiveness influence a country's

attractiveness to foreign capital. Schuller (2008) studied the level of globalization and

openness in the Baltic states since the change of systems and he points out that the

Baltic states had increasing levels of openness and competitiveness since the fall of

the Soviet Union, and they maintain these high levels ever since. The capability to

attract FDI is very much linked to competitiveness and as it is discussed in the previous

chapter the e-government is one of the tools that can raise that.

Besides the basic gravity-theory mandating that FDI flows depend on economy

sizes, there are a number of other factors influencing the decision to move capital to a

country. Tintin (2013) investigated the institutional determinants of FDI in post-socialist

economies by including four composite institutional variables alongside traditional

macroeconomic ones: economic freedoms, state fragility, political rights, and civil

liberties, along with GDP and openness measures. The analysis finds all factors

significant and robust in explaining FDI-growth. In connection to e-government, the

variable of interest is economic freedoms, which is a composite index of 10 measures

revolving around rule of law, government size, regulatory efficiency and market

openness. Measures about regulatory efficiency are particularly influenced by e-

government as those are focused on regulatory and administrative burden,

transparency, and the ease of setting up new ventures. Since the study have found

these variables to be robust in explaining changes in FDI, it is plausible that a well-

implemented e-government system can indeed increase the openness of the country.

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ANALYSIS

Usage Data

For the purposes of this study the number of authentications and the number of

signatures is used to measure the usage of digital services.

Authentications happen every time a user logs in to a service, making this an

excellent measure, as it not only shows the number of people using these services,

but also embodies usage frequency, this way being a measure of usage intensity.

The digital signature is a cornerstone to the e-government system, as a digital

signature is needed whenever a paper-based signature would be required if

administration was done on paper. This way it basically shows the number of

transactions, contracts and settled errands via the system.

0

50

100

150

200

250

300

350

400

450

500

20

03

20

04

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20

10

20

11

20

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20

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20

14

20

15

20

16

Mill

ion

s

Cumulative number of Authentications and Signatures

(annual average)

Authentications Signatures

0%

50%

100%

150%

200%

0

20

40

60

80

100

1202

00

3

20

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16

Mill

ion

s

Stationarity and Transformations

Auth. chg. Sign. chg.

Auth. %chg. Sign. %chg.

Figure 6 – Usage Data of Digital Services

(Source: Certification Authority)

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Data was sourced from the Certification Authority of the system, handling all

authentications and signatures for all services.1

The provided dataset contains the growth in the number of authentications and

signatures per month from January 2007 to March 2016. This data was transformed to

monthly levels, which in turn was used to create the time series of annual changes and

annual averages as the overwhelming majority of the dependent variables in this

research are only available in the form of annual data.

The Vassil (2015) paper contained annual changes for years 2003-2006, so these

were added to the dataset's annual figures resulting in having annual data 2003-2016

and monthly data 2007/01 - 2016/04.

Citizens’ Attitudes

Hypotheses

Based on the literature review, the experience of using digital services can

strengthen people's trust in the state in a multitude of ways:

Increased perceived performance of government service delivery

(Przeworski et al. 1996)

Increased perception of a transparent and efficient administration

(Mishler and Rose 2001)

Being a more pleasant and convenient interaction with government

(Lipsky 2010; Levi 1996)

1 Special thanks to Kalev Pihl, CEO of the Certification Authority for providing the usage data, to Robert Krimmer and Crystal LaGrone for their generous help in providing information on the system and for connecting me with Mr. Pihl, and to János Kertész for providing the lead to Professor Krimmer.

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Usage of e-government itself is found to balance out the decrease of trust from

using the Internet, therefore it must influence trust in state positively (Im et al.

2014)

Based on these theories they hypotheses to investigate are the following:

H 1.1 Trust towards institutions: The usage intensity of digital services is

positively correlated with the general prevailing trust in the state.

In order to test this hypothesis, I examine the levels of trust in the Estonian society

using data from the European Social Survey. Furthermore, as it was discussed in the

literature review, perceived level of corruption is also related to level of trust, so I also

examine correlation between usage of digital services and perceived levels of

corruption using the Corruption Perceptions Index of Transparency International. Since

the portfolio of digital services also include the possibility to vote online on elections

and trust in the state is expected to influence turnout on votes, I examine election

turnouts as well:

H 1.2 Corruption perception: The usage intensity of digital services is

negatively correlated with the general perception of corruption of the country.

H 1.3 Election turnouts: The possibility of electronic voting increases election

turnout.

Data Sources and Description

Trust data is acquired form the European Social Survey. It is a survey

administered every two years in all EU Member States. The aim is to gauge the

attitudes of society towards social, political and moral issues. There are 7 variables

relating to trust under the political indicators section of the survey:

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1. Trust in the national parliament

2. Trust in the legal system

3. Trust in the police

4. Trust in politicians

5. Trust in political parties

6. Trust in the European Parliament

7. Trust in the United Nations

All these variables are measured on a 0-10 ordinal scale where 0 means the

respondent doesn't trust the institution at all and 10 means the opposite. Data is

available 2002-2012 for every two years for all countries, resulting in 5 data points.

Results of the 7th round are published continuously, and the Estonian data is already

public, but not of all countries. Due to the small number of data points, only descriptive

analysis is performed.

Corruption data is sourced from Transparency International. The Corruption

Perceptions Index (CPI) is a composite index aggregating the assessment of 12

institutions and 13 surveys mainly based on the assessment of analysts and business

people. The survey assigns a score to each country on a scale of 0 – 100 since 2012

(0 – 10 before), where 0 is the most corrupt and 100 is the least corrupt. Countries are

also ranked. Since TI doesn’t provide access to a consolidated database, the

aggregation of survey rounds prepared by the Center for Economic Studies (CES) is

used.

For the purposes of this analysis, recent scores of 0-100 are converted back to

the previously used 0-10 scale dividing by 10. Data is available 1998 – 2015 on an

annual basis.

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Election turnout data is acquired from the International Institute for Democracy

and Electoral Assistance (IDEA). The data contains all local, national and European

Parliament elections since the country's re-independence, the first being the national

election of 1992. The following variables are available:

Whether or not digital voting was allowed (Yes / No)

Type of election (National / Local / European)

Date of election

Size of electorate (number of eligible persons)

Turnout (number of votes as a percentage of eligible voters)

Number of votes

Number of digital votes

(Generated) Number of paper votes (All – digital)

(Generated) Share of paper votes (% of all)

(Generated) Share of e-votes (% of all)

Although only 17 data points (8 for e-voting) in total are available, in addition to

descriptive analysis, a regression of turnout on usage data is also performed to allow

for patterns to emerge if any.

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Trust in Institutions

Figure 7 – Estonians’ Levels of Trust in Different Institutions (Scores)

Looking at the ESS results for trust, it is not really possible to conclude anything

regarding the effect of digital service usage, as data resolution is too low and trust is

likely influenced by a vast number of factors through a multitude of channels. What is

clear from the time series is that most trust variables fluctuate around a mean, except

for trust in foreign institutions (EP and UN) which declined by 2014 relative to other

trust variables, as it can be seen how they leave the seasonal pattern. The cyclical

pattern might be due to elections as well: all local maxima are before national elections

and minima are after (national election years were 2003, 2007, 2011, and 2015).

Looking at the changes of Estonians’ trust over time is more informative if

compared to other countries. Also, global influences, such as the financial crisis of

2008 can be accounted for this way. Unfortunately, such ranking can only be done until

2012 at the moment, as 2014 figures are not available for all countries yet:

3

3.5

4

4.5

5

5.5

6

6.5

2004 2006 2008 2010 2012 2014

Estonians' Levels of Trust in Different Institutions(Respondents' averages)

Trust in country'sparliament

Trust in the legalsystem

Trust in the police

Trust in politicians

Trust in political parties

Trust in the EuropeanParliament

Trust in the UnitedNations

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Figure 8 - Estonians’ Levels of Trust in Different Institutions (Ranking)

Looking at rankings, it can be concluded that there seems to be a decline in trust

compared to other countries, but since the timeframe is short, ranking might also

exhibit cyclicality in the medium-to-long run.

H 1.1 All in all, based on the data available, it is not possible to reject the null

hypotheses, and it cannot be said that the usage of digital services is

accompanied by any increase in trust levels.

However, I believe that the failure to find evidence is merely a result of a lack of

adequate data on the issue. As it was mentioned in the literature review, more scholars

have confirmed the positive relationship in other cases, and I see no reason to believe

that psychological mechanisms of trust are different for Estonians. Further study of the

issue is advised as more data becomes available and / or an in-depth primary research

is feasible.

1112 12

19

15

11

14 14

19

15

89

17 17

14

1213 13

20

16

8

1213

19

1617

2221

27

21

1918 18

22

17

2004 2006 2008 2010 2012

Trust in country'sparliament

Trust in the legalsystem

Trust in the police

Trust in politicians

Trust in politicalparties

Trust in theEuropean Parliament

Trust in the UnitedNations

Estonians' Levels of Trust in Different Institutions(Respondents' averages ranked per country)

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Corruption

Figure 9 – Corruption Perception Score and Rank of Estonia

Examining the score and rank of the country over time, we can see a slow but

steady improvement. Trying to back this up with more exact results, the regressions

yield no significant numbers.

H 1.2 Using the available data, the null hypothesis cannot be rejected, and no

relationship can be concluded between using digital services and the perceived

corruption levels in the country. Further study is advised as data becomes more

abundant.

0

1

2

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15

20

25

30

35

Perceived Corruption

Rank Perception

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Election Turnout

Figure 10 – Election Turnouts

Looking at the descriptive graph of election statistics over time, three things can

already be seen:

Electronic votes are replacing ordinary votes at a steady rate.

National elections have the highest turnout rates, followed by local and

European ones.

Since the advent of electronic voting, turnout is on an increasing trend in all

elections types.

In order to back up the visual impressions with something more solid, a

regression was run to see how turnouts are related to the type of election, the

availability of e-votes and the usage intensity of digital services:

0%

20%

40%

60%

80%

100%

Dat

e

19

92

-09

-20

19

93

-10

-17

19

95

-03

-05

19

96

-10

-20

19

99

-03

-07

19

99

-10

-17

20

02

-10

-20

20

03

-03

-02

20

04

-06

-13

20

05

-10

-16

20

07

-03

-04

20

09

-06

-07

20

09

-10

-18

20

11

-03

-06

20

13

-10

-20

20

14

-05

-25

Turnout (Local) Turnout (EP)

Turnout (National) Share of paper votes

Share of e-votes

Election turnouts, paper and e-votes

ELECTRONICVOTINGAVAILABLE

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Turnout Turnout

% Change Number of Authentications

-0.000105

(0.0105)

% Change Number of Signatures -0.00396

(0.0134)

Election is Local 0.150 0.147

(0.0663) (0.0688)

Election is National 0.230** 0.231**

(0.0403) (0.0444)

E-vote available 0.132* 0.131*

(0.0394) (0.0441)

Constant 0.270*** 0.276***

(0.0160) (0.0219)

N 9 9

R-sq 0.907 0.908

Standard errors in parentheses * p<0.05 ** p<0.01 *** p<0.001

Table 1 – Regression Results of Election Turnouts and Service Usage

Although having 9 observations is far from solid evidence, the regression backs

up the visual intuition of the descriptive graph: According to the data, overall on

average, the availability of electronic voting is associated with a 9 ~ 17

percentage points higher turnout at an election, controlling for election type.

The regression also shows that election type is a significant to turnout: Local and

European Parliament elections are both exhibiting lower turnout rates, while overall on

average according to the data, a national election is expected have a

19 ~ 27 percentage points higher turnout then municipal or European ones,

controlling for electronic voting availability.

H 1.3 Data seems to confirm the hypothesis that the availability of e-voting

increases election turnouts, however the low number of years available to study

and the lack of an instrumental variable or a control group means that the results

must be taken with a grain of salt, and although causality is intuitively plausible,

formally is not proven by this regression.

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Further validation of the results is advised as more data becomes available over

time.

Competitiveness and Productivity

Hypotheses

As Allers (1994), A. F. M. Nijsen (2003), and Ntaliani, Costopoulou, and Sideridis

(2012) all point out, coping with administrative burden ties down a considerable amount

of company resources. The amount of administrative burden is an integral factor to the

competitiveness of an economy. The advent of the Estonian e-government services

lowers exactly this burden, therefore

H 2.1 It is expected that usage of digital services is correlated with the

improvement of the competitiveness of the economy through reduced regulatory

burden.

In order to test this, I examine scores and ranks of the different aspects of the

Estonian business environment over time, and study the change in different measures

of productivity.

H 2.2 Increased usage intensity of digital services is accompanied by an

increase in productivity.

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Data Sources and Description

Two datasets are used to study the changes of the business environment over

time: The dataset of the Global Competitiveness Report of the World Economic Forum

(WEF GCR) and the Doing Business Report of the World Bank (WB DB).

WEF Global Competitiveness Report. WEF “defines competitiveness as the

set of institutions, policies and factors that determine the level of productivity of an

economy, which in turn sets the level of prosperity that the country can achieve” (World

Economic Forum 2016a). The GCR is published by the WEF every year, and each

country is assessed on the above through a large number of variables having a score

and a country rank for each. Data is available on an annual basis from 2007 to 2016

for the majority of variables. Only variables that have a significant relationship with

service usage are presented in the next section.

WB Doing Business. The WB also prepares a similar report each year, but with

a much narrower focus. While the GCR measures things such as the quality of the

education system, public health or broadband internet availability, the DB report

focuses purely on business related issues, such as time and number of filled out forms

needed to register a business, quality of dispute settlement or protection of minority

investors. Countries are assessed by scores and ranks, but WB also includes a handy

distance to frontier (DTF) metric that takes the best performing country’s score as

100% and expresses other countries score as a percentage of that. DTF values are

available 2004 – 2016 or 2006 – 2016 on an annual basis.

For testing hypothesis 2.1, select business environment variables from the GCR

and DTF values from the DB are regressed on usage data.

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Productivity data is sourced from the latest Penn World Table (PWT) and The

Conference Board Total Economy Database (TED). The following variables are

selected from these databases:

Total Factor Productivity Level

(Current PPPs, USA=1, from PWT, available annually 1990-2011)

Total Factor Productivity Growth

(Tornqvist Index, from PWT, available annually 1993-2014)

Labor Productivity per Hour Worked

(in 2014 USD converted to 2014 price level with updated 2011 PPPs, from TED,

available annually 1990-2015)

Labor Productivity per Hour Worked Growth

(percent change from previous year, from TED, available annually 1990-2015)

Competitiveness

In order to uncover relationships between changes in business environment

scores, an initial subset of 61 variables were selected based on the likelihood of a

relationship suggested by the literature. After the first differenced and log-differenced

transformations of these variables were generated, those level and first-differenced

variables that were non-stationary according to a Philips-Perron and Augmented

Dickey-Fuller tests were dropped in order to minimize the chance of detecting spurious

correlations. The remaining variables were regressed on usage intensity, and after

dropping borderline significant cases, only the variables of regulatory burden and the

aggregate GCI-value remained as significant.

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Dependent Variables Explanatory Variables Reg. Sats

Name Type, improve worsen

ß of Number of

Sign. ∆%

ß of Number of Auth. ∆%

Std. Err. Of N. Sign ∆%

Std. Err. Of N. Auth ∆%

N R2

Burden of government regulation, 1-7 (best)

Score ∆ 0.175* (0.0575) 9 0.513

Score ∆ 0.235** (0.0601) 9 0.585

Score ∆% 0.0411* (0.0135) 9 0.511

Score ∆% 0.0550** (0.0143) 9 0.577

GCI Aggregate Score 0.0521** (0.0112) 10 0.469

Score 0.0462*** (0.00874) 10 0.445

Rank -2.051** (0.439) 10 0.492

Rank -1.719*** (0.325) 10 0.417

Score ∆% -0.0178** (0.00472) 9 0.492

Score ∆% -0.0244*** (0.00381) 9 0.588

Score ∆ -0.0841** (0.0218) 9 0.505

Score ∆ -0.115*** (0.0175) 9 0.600

Table 2 – Regression Results of Business Environment Variables and Service Usage

Regulatory burden. Although the score of regulatory burden were decreasing

and the corresponding rank worsening since 2010, the regression results suggest that

the decline would have been even worse without digital services, as there is a

significant positive correlation between the change in service usage and change in

score.

Aggregate GCI Score. The aggregate GCI score is the weighted score resulting

from aggregate scores of subcategories of variables, therefore all GCI variables

influence this figure. The GCI scores of Estonia are improving, just like its ranking.

According to the regression, both the scores and ranks are improving with service

usage, but results also show that the higher the increase in service usage, the lower

the improvement in GCI score. This has probably to do with changes in other variables

making up this aggregate index and the small number of observations.

H 2.1 Based on the results the hypothesis can be confirmed. Usage of digital

services indeed seem to be associated with improvement in the change of

regulatory burden scores, but the scores merely decrease less instead of

increasing, suggesting that some other factors are offsetting a positive effect of

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digital services, if any. Competitiveness scores are recovering since 2010, but

in order to establish causality, a more in-depth analysis needs to be conducted.

Productivity

The regression results on productivity show no connection between usage and

productivity variables whatsoever.

H 2.2 There is not enough evidence to reject the null hypothesis, and it cannot

be concluded that an increase in the usage of digital services is associated with

any change in productivity levels.

Openness

Hypotheses

As (Schuller 2008) pointed out in his study, the Baltic states had increasing levels

of openness and competitiveness since the change of systems, and as Tintin (2013)

states, regulatory efficiency is an important determinant of the competiveness and

therefore attractiveness of a country. In this section, I examine if there is a relationship

between the usage intensity of digital services and foreign direct investment inflows to

the country.

H 3.1 An increase in the usage intensity of digital services is associated with

an increase of FDI-inflows into the country.

If the country indeed becomes a more attractive investment destination, that

should also show up in business demographics data. Therefore, the second hypothesis

for this chapter is:

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H 3.2 An increase in the usage intensity of digital services is associated with

an increase of foreign business ownership in the country.

Data Sources and Description

Foreign Direct Investment was the sole data in this paper that is available in a

higher resolution than annual. Quarterly data was acquired from the Federal Reserve

Bank of St. Louis and Eurostat:

FDI stocks

(National currency, available 1992Q2 – 2013Q4 quarterly, FED)

FDI flows

(Percentage change quarter-on-quarter, available 1992Q3 – 2013Q4 quarterly,

FED)

FDI Stocks

(mEUR, 1997-2012, annual, Eurostat)

Business demography data was sourced from the Estonian Statistical Office

and Eurostat.

Number of enterprises by ownership

(count, available 2000-2015 annually, Statistics Estonia)

Number of enterprise groups by country of owner

(count, available 2004-2015, Statistics Estonia)

Enterprise birth rates

(New companies / All, %, 2004-2013, Statistics Estonia)

Market integration

(Average values of inward and outward FDI / GDP * 1000, 1997-2012, Eurostat)

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FDI

After transforming monthly usage data to quarterly and regressing FDI growth,

regressions were performed using various lag structures. Probably due to the still small

number of observations, some lag specifications showed borderline significant

coefficients, but those were not robust. Therefore, the most conservative result is

reported here, which is:

FDI (Kroon) Change in FDI (mEUR)

% Chg. In Number of Signatures

135,777,930.0** 312.9*

(36,166,744.7) (112.5)

Constant 238,040,173.4*** 637.5 (39,991,818.3) (329.2) N 24 9 R-sq 0.085 0.190

Table 3 – Regression Results of FDI Stocks and Service Usage

A quarter with 10 percentage points higher increase in the usage intensity shown

by the number of signatures is associated by a 13 million kroons (~ 870 thousand €)

higher FDI stock in the country, overall on average, according to the limited data

available.

H 3.1 Based on the limited data available the hypothesis can be confirmed,

although a more in-depth study should be undertaken to establish the existence

and dynamics of causality between the usage of digital services and FDI-levels.

Business Demography

Examining changes in business demography in association with changes in the

usage intensity of digital services yields no significant results.

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H 3.2 Using available data, it is not possible to reject the null hypothesis, and I

cannot conclude that there is any association between digital service usage

intensity and changes in business demography in terms of foreign ownership.

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CONCLUSIONS

The goal of this thesis was to establish if there is a positive association between

the usage of e-government services and citizen’s attitudes, competitiveness and

productivity, and openness of the economy in the case of Estonia.

In the area of citizens’ attitudes, although literature suggests, nor changes in trust

levels, nor changes in the perception of corruption could be verified to have a

relationship with the changes in usage intensity. However, it seems that the availability

of electronic voting is associated with increased election turnouts.

In terms of competitiveness and productivity, changes in productivity could not be

confirmed to have any relationship with changes in service usage, but in terms of the

business environment, higher usage is associated with a lower deterioration of the

administrative burden scores of the country.

When it comes to the openness of the country, it cannot be concluded that foreign

ownership is changing significantly in terms of the usage of digital services, but there

seems to be a positive relationship with the stock of FDI.

Based on these findings, it can be concluded that the availability and the usage

intensity of digital services is associated with favorable tendencies in the economy, but

those favorable changes are in some cases also being offset by negative ones (e.g.

regulatory burden), or diminish on a macro level (e.g. productivity).

Overall, the goal of the thesis to measure changes in such complex and rather

qualitative phenomena as trust, or such aggregate macro-level measures as

productivity was probably too ambitious for the timeframe examined, as all variables

involved in this analysis except for FDI were available only on an annual basis resulting

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in a major bottleneck for this project. Despite this shortage of data, some findings are

still visible, but in order to establish the existence and dynamics of causal relationships,

conducting further, more in-depth research is advised.

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POLICY RECOMMENDATIONS

Based on the conclusions of this research, it seems evident that the digital

services offered in Estonia are associated with favorable tendencies in election

turnouts, regulatory burden and FDI-levels, therefore these should be continued and it

is recommended to further extend the scope of these services.

However, it is suspected that the favorable effects of the availability and spread

of digital service usage cannot fully manifest at this moment, as regulatory burden

scores are still worsening for some reason, and productivity is below optimal levels.

Unfortunately, the score of regulatory burden in the Global Competitiveness

Report is based on an expert survey that is publicly unavailable, so the exact cause of

the worsening scores are not known. Nevertheless, competitiveness and productivity

can be improved by tackling some other areas of the economy. As the overall

assessment of Estonian competitiveness was out of the scope of this paper, the

following recommendations are partly based on the assessment of international

organizations:

According to the WB DB Report, Estonia has worsening rankings in the areas of

Getting Credit, Enforcing Contracts and Resolving Insolvency (World Bank

2016). Therefore, it is recommended to improve regulation in these areas by

developing reforms based on consultation with businesses and considering the

adoption of best practices from other countries.

Based on the most recent country report of the European Commission, it is

further recommended to close the gender gap in educational participation, and

combat early school leaving. The country is currently facing skill shortages in

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developing technology-intensive high value-added sectors, and this should be

mitigated through investing in education (European Commission 2016).

Energy efficiency is still lower than in other EU countries, therefore investments

should be made into refurbishing public buildings and a scheme should be set

up to support the energy efficiency upgrades of residential buildings (European

Commission 2016).

All-in-all, things in the country look good: The aggregate score for the business

environment is improving in both benchmarks, the country's finances are in

exceptionally good shape, and employment is at record levels (European Commission

2016). This way, the most important recommendation is to keep up the current

progress, carry on with ongoing reforms while maintaining their political support

in the population, by ensuring that benefits reach all parts of society and are well

communicated.

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